Can a Third Party Sue an Insurer for Unfair Trade Practices?
Can a third party use N.C. Gen. Stat. § 75-1.1 to sue an insurer based on an insured’s misdeeds? A recent decision by the North Carolina Business Court answers with a qualified “no.”
North Carolina law has usually barred third parties from suing insurers. Courts have recognized exceptions, however, when a third party is an intended beneficiary of an insurance policy. USA Trouser, S.A. de C.V. v. Williams imports that idea into the law under section 75-1.1.
Was USA Trouser Faked Out of Its Socks?
USA Trouser (belying each part of its name) manufactured socks in Mexico. A distributor in North Carolina, International Legwear Group, ordered socks from USA Trouser. Shortly after placing its final order for socks, International sold all of its assets to another company. In the wake of the asset sale, International could not pay USA Trouser.
In federal court, USA Trouser sued International and three of its officers and directors for fraud, breach of fiduciary duty, and violations of section 75-1.1. It alleged that International committed all these violations by ordering socks without telling USA Trouser about International’s inability to pay.
International had an insurance policy that covered director and officer (D&O) liability. At the beginning of the federal lawsuit, the D&O carrier defended International and the individual defendants alike. Soon, though, the law firm appointed by the D&O carrier withdrew from representing International.
In the end, the federal court entered a default judgment against International for about two million dollars. USA Trouser demanded that International’s D&O insurer pay this judgment, but the insurer refused.
USA Trouser Sues the D&O Insurer Directly
USA Trouser then sued the insurer, the insurer’s parent company, and one of International’s officers in North Carolina state court. USA Trouser accused the insurer of conspiring with others to cause International to default in the federal lawsuit, then refusing to pay the default judgment.
USA Trouser’s theories against the insurer included an assertion of bad-faith claims handling in violation of N.C. Gen. Stat. § 58-63-15(11). USA Trouser also asserted a 75-1.1 claim against the insurer.
The case found its way to the North Carolina Business Court. In the Business Court, the insurer moved to dismiss all of USA Trouser’s claims against it, including the bad-faith claim and the 75-1.1 claim. Chief Judge Gale granted that motion to dismiss.
The court first dismissed the count under the claims-handling statute, because that statute does not include a private right of action. In contrast, the court shone a ray of hope on USA Trouser’s 75-1.1 claim: it noted that a violation of the claims-handling statute is a per se violation of section 75-1.1.
That ray of hope, however, soon faded. In the end, the court held that North Carolina law categorically barred the liability that USA Trouser was seeking. The court reached this conclusion after analyzing two lines of decisions from the North Carolina Court of Appeals.
In Wilson v. Wilson, the Court of Appeals held that a third party could not pursue a 75-1.1 claim against the insurer of an adverse party. The court reasoned that the third party was a stranger to the insurance contact and also lacked privity with the insured itself. The Wilson court expressed the concern that allowing third parties to sue insurers would encourage frivolous settlement demands against insured parties. The court also worried that third-party claims would cause a conflict with an insurance company’s duty to act in good faith on behalf of its insured.
The same year that the Court of Appeals decided Wilson, however, another panel of the Court of Appeals allowed a third party to pursue a 75-1.1 claim against an insurer. The plaintiff in that case, Murray, was injured in a car accident with a person who had a Nationwide Mutual liability policy. The Court of Appeals distinguished Wilson on the theory that the injured party in Murray was an intended third-party beneficiary of the Nationwide insurance contract. To support that theory, the Murray court reasoned that protecting victims of auto accidents is one reason why North Carolina requires drivers to carry auto liability insurance.
To decide USA Trouser, the Business Court had to choose between the Wilson and Murray lines of cases. To make that choice, the court asked whether USA Trouser was an intended third-party beneficiary of International’s D&O insurance policy.
The court held that USA Trouser was not such a beneficiary. Unlike the accident victim in Murray, USA Trouser was not a party whom other law—such as the statute that requires minimum levels of auto liability insurance—marks as an intended beneficiary of liability insurance. In addition, the D&O policy at issue in USA Trouser did not expressly allow third parties to sue under it. In the end, the court saw no “policy justification that would require a court to [hold] that a company’s general liability or D&O liability insurance coverage inures to the direct benefit of injured trade creditors like USA Trouser.”
When future third parties file 75-1.1 claims against insurers, courts are likely to analyze the same factors that the court addressed in USA Trouser. Unless another body of law or an insurance contract itself seeks to protect a third party, that party’s 75-1.1 claim will fail as a matter of law.
Author: George Sanderson